International Accounting Exam
Answer Key
Course Introduction
International Accounting explores the principles, standards, and practices of accounting in a global context, comparing major international frameworks such as IFRS and US GAAP. The course examines the challenges and strategies involved in financial reporting for multinational corporations, including currency translation, international taxation, global financial statement analysis, and cross-border regulations. Students will gain a comprehensive understanding of accounting harmonization efforts, the role of international standard-setting bodies, and the implications for decision-making in diverse economic environments.
Recommended Textbook
Advanced Financial Accounting 6th Edition by Thomas H. Beechy
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Page 2
Chapter 1: Setting the Stage
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Q1) What does accounting harmonization refer to?
A)The smoothing of income between periods by a company
B)Achieving a high level of consistency among accounting standards of different countries
C)All companies using the same accounting standards
D)Reconciling financial statements prepared under pre-IFRS GAAP to financial statements prepared under IFRS
Answer: B
Q2) What was the main reason for adopting international standards?
A)Internationalization of securities markets
B)Internationalization of financial markets
C)Globalization of business
D)Increasing complexity of GAAP
Answer: A
Q3) Which of the following covenants would not appear in a loan agreement?
A)Limits on additional debt
B)Dividend payout limitations
C)Valuation
D)Minimum times-interest-earned ratio
Answer: C
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Chapter 2: Intercorporate Equity Investments: an Introduction
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Q1) Townsend Ltd.has the following shareholders:
Palermo Co.- 60%
Nix Ltd.- 30%
Riley Ltd.- 10%
Nix has two seats on Townsend's five-person board of directors.Which of the following statements is true?
A)Nix has significant influence over Townsend.
B)Nix has control over Townsend.
C)Townsend is a special purpose entity to Nix.
D)Nix should treat Townsend as a passive investment.
Answer: A
Q2) Bud Ltd.owns 100% of Calla Co.Calla owns 55% of Daisy Ltd.and Daisy owns 90% of Fern Ltd.Which of the following statements is true?
A)Only Bud has to prepare consolidated financial statements.
B)Only Bud and Calla have to prepare consolidated financial statements.
C)Only Bud and Daisy have to prepare consolidated financial statements.
D)Bud,Calla,Daisy,and Fern have to prepare non-consolidated financial statements. Answer: D
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Chapter 3: Business Combinations
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Q1) Which of the following is not a business combination?
A)Statutory amalgamation
B)Joint venture
C)A company's purchase of 100% of another company's net assets
D)A company's purchase of 80% of another company's voting shares
Answer: B
Q2) There are a number of possible approaches to reporting consolidated financial statements after one company acquires control over another.Which of the following methods reports the consolidated amounts by adding together the carrying values of the assets and liabilities of the parent and the subsidiary?
A)Pooling-of-interests method
B)Acquisition method
C)Purchase method
D)New entity method
Answer: A
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Chapter 4: Wholly-Owned Subsidiaries: Reporting
Subsequent to Acquisition
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Q1) What does "one-line consolidation" refer to?
A)Cost method
B)Equity method
C)Direct method of consolidation
D)Worksheet method of consolidation
Q2) The goodwill impairment test does not involve ________.
A)allocation of goodwill to reporting units
B)elimination of all goodwill as a consequence
C)estimation and judgement on the part of management
D)an opportunity for a "big bath"
Q3) Which of the following consolidation adjustments will be required for a subsidiary that was acquired as a going concern,but will not be applicable for a parent-founded subsidiary?
A)Amortization of fair value increments on plant and equipment
B)Unrealized profits in ending inventory
C)Unrealized profits in beginning inventory
D)Future income tax on unrealized profits
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Page 6
Chapter 5: Consolidation of Non-Wholly Owned
Subsidiaries
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Q1) Olthius Ltd.purchased 60% of Fredo Ltd.for $1,500,000.At the date of acquisition,the carrying value of Fredo's net identifiable assets was $1,800,000 and the fair value was $2,200,000.What is the amount of the goodwill under the entity method?
A)$(300,000)
B)$120,000
C)$300,000
D)$400,000
Q2) Sunny Co.purchased 80% of Reuben Ltd.for $1,200,000.At the date of acquisition,the carrying value of Reuben's net identifiable assets was $1,000,000,and the fair value was $1,300,000.What is the amount of the goodwill under the entity method?
A)$0
B)$200,000
C)$240,000
D)$300,000
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Chapter 6: Subsequent-Year Consolidations: General Approach
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Q1) Dixon Ltd.owns 60% of the common shares of Kelly Co.Kelly sold a machine with a book value of $350,000 to Dixon for $410,000.When Dixon prepares its consolidated financial statements,it makes an adjustment to reduce the amortization.What is the effect of this adjustment?
A)The total decrease in amortization will flow through to ending retained earnings.
B)The total decrease in amortization will flow through to the ending non-controlling interest.
C)60% of the decrease in amortization will flow through to ending retained earnings and 40% will flow through to the ending non-controlling interest.
D)40% of the decrease in amortization will flow through to ending retained earnings and 60% will flow through to the ending non-controlling interest.
Q2) On the consolidated statement of financial position,which balances differ Between the parent-company extension method and the entity method?
A)Retained earnings and goodwill
B)Retained earnings and non-controlling interest
C)Goodwill and non-controlling interest
D)Common shares and retained earnings
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Page 8
Chapter 7: Segmented and Interim Reporting
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Q1) Yang Ltd.will issue interim financial statements for its second quarter.Which statement(s)must report details of the second quarter as well as for the year-to-date?
A)Statement of comprehensive income only
B)Statement of changes in equity only
C)Statement of comprehensive income and statement of changes in equity only
D)Statement of comprehensive income,statement of changes in equity,and statement of cash flows only
Q2) In Canada and the United States,at a minimum,how often are interim financial statements required to be issued?
A)Monthly
B)Bi-monthly
C)Quarterly
D)Semi-annually
Q3) Which of the following is not a threshold for identifying a reportable segment?
A)The segment contributes at least 10% of the organization's total revenues.
B)The segment contributes at least 10% of the organization's operating profits.
C)The segment contributes at least 10% of the organization's combined assets of all operating segments.
D)The segment contributes at least 10% of the organization's total expenses.
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Page 9
Chapter 8: Foreign Currency Transactions and Hedges
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Q1) Fransen Co.does a lot of businesses in Denmark.It has numerous trade accounts receivables and accounts payables that are to be settled in Danish krones.What type of hedge does Fransen have?
A)Fair-value hedge
B)Cash-flow hedge
C)Natural hedge
D)Hedge instrument
Q2) Under IFRS,a hedging relationship qualifies for special hedge accounting rules,only if it meets five conditions.
Required:
Explain the five conditions that must be met for a derivative to qualify for special hedge accounting.Identify what qualifies as a "hedged item".Identify what qualifies as a "hedging instrument".Outline the conditions required for a hedge to be "highly effective with respect to foreign exchange risk".
Q3) What is the effect of fluctuations in exchange rates on accounts payable?
A)Deferred and amortized
B)Deferred to maturity
C)Recognized immediately in income
D)Recognized if losses,deferred if gains
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Page 10
Chapter 9: Reporting Foreign Operations
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Q1) Which of the following factors is a primary indicator used to choose a functional currency?
A)Autonomy of the subsidiary
B)Proportion of intercompany transactions
C)Sources of competitive forces and regulations
D)Ability of subsidiary to generate cash flows to service its debts
Q2) Which of the following accounts would be translated to the reporting currency at the current rate of exchange for an integrated subsidiary?
A)Sales occurring evenly throughout the year
B)Deposits received from customers for services to be rendered
C)Capital assets
D)Inventory carried at market under the lower-of-cost-or-market principle
Q3) Under the current-rate method,which of the following items would be translated using the historical rate?
A)Land
B)Inventory
C)Long-term debentures
D)Share capital
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11
Chapter 10: Financial Reporting for Not-For-Profit Organizations
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Q1) Under the CICA Handbook,a large not-for-profit museum or art gallery ________.
A)must capitalize the cost of collections
B)may capitalize the cost of collections
C)must only disclose the cost of collections in the notes to the financial statements
D)must expense the cost of collections
Q2) When is it not appropriate to use an encumbrance system?
A)When there is a significant lag between purchase orders and the receipt of goods
B)When reporting is done on an expenditure basis
C)When only a small part of expenditures for goods and services are discretionary
D)When commitments and expenditures are made on a decentralized basis
Q3) Which of the following reporting objectives for not-for-profit organizations allows the users to determine whether restricted funds were spent in accordance with the intended purpose?
A)Cash flow prediction
B)Performance evaluation
C)Stewardship
D)Measuring the cost of services rendered
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Page 12
Chapter 11: Public Sector Financial Reporting
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Q1) Tangible capital assets owned by governments are viewed differently than tangible capital assets owned by business enterprises.Explain this difference and describe how tangible capital assets are reported for governments.
Q2) What does the carrying value of tangible capital assets represent to government?
A)Source of future cash flows from the capital assets
B)Tax value of the capital assets
C)Acquisition cost of Crown assets
D)Unexpired service potential of the capital assets
Q3) One of the largest sources of revenue for governments is government transfers.Government transfers represent non-exchange revenue.Explain what "government transfer" is and why it is a non-exchange transaction.How are government transfers reported? Be sure to address reporting from the transferor and the recipient perspectives,separately.
Q4) Recent surveys have suggested that there are several qualitative characteristics that are desirable in published financial reports of governmental units.List and briefly discuss each of the four major qualitative characteristic desired.
Q5) Clearly distinguish between a government business organization and a non-business government organization.
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Chapter 12: Income Tax Allocation
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Q1) O'Ball Ltd.wants to acquire Kiro Ltd.to take advantage of its tax losses and credit carry forwards.In what way can O'Ball accomplish this?
A)O'Ball can purchase Kiro's net assets.
B)O'Ball can do a share exchange with Kiro.
C)O'Ball can either purchase Kiro's net assets or purchase Kiro's shares.
D)O'Ball can either purchase Kiro's net assets or do a share exchange with Kiro.
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Chapter 13: Income Tax Allocation Subsequent to Acquisition
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Q1) Morin Co.acquired all the shares of Lightfoot Ltd.Lightfoot has a number of amortizable capital assets and has properly recorded the related deferred income taxes on its books.At the time of acquisition,the fair values of these assets were higher than their carrying values and their tax bases.In Morin's consolidation each year,it must adjust for the deferred taxes that resulted from these temporary differences.Which of the following statements is true?
A)The consolidation adjustment will always result in an increase in the deferred tax liability.
B)The consolidation adjustment will always result in a decrease in the deferred tax liability.
C)The consolidation adjustment can result in either an increase or a decrease in the deferred tax liability.
D)The consolidation adjustment is required only if the tax basis changes.
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15
Chapter 14: Good will Impairment Test
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Q1) How often should goodwill acquired in a business combination be tested for impairment?
A)Whenever there is an indication of impairment
B)Whenever there is a change in circumstances in the business
C)At least once a year
D)At least once every two years
Q2) For private enterprises that have acquired goodwill in a business combination,which of the following is considered a change of circumstances for purposes of testing for goodwill impairment?
A)A large unfavourable income tax reassessment
B)Sale of a capital asset for a small loss
C)A major competitor has ceased operations
D)Retirement of the subsidiary's operations manager
Q3) How should goodwill acquired in a business combination be allocated?
A)Proportionately to assets
B)Proportionately to fair-value increments
C)To cash-generating units
D)It is not allocated.
Q4) Compare and contrast the goodwill impairment test under IFRS and accounting standards for private enterprises (ASPE).
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Chapter 15: Step Purchases
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Q1) Husch Ltd.acquired 35% of the common shares of Megia Ltd.on June 30,20X1.Husch uses the equity method to record its investment.On June 30,20X8,Husch acquired another 40% of Megia's common shares.At June 30,20X8,how should the original 35% ownership be treated?
A)The original valuation of the 35% is added to the valuation of the 40%.
B)The original 35% investment is deemed to have been disposed of and reacquired at the fair value at June 30,20X8 and added to the new acquisition.
C)The carrying value of the original 35% at June 30,20X8 is added to the new acquisition. D)The original 35% is irrelevant to the new acquisition and should be ignored.
Q2) Frey Ltd.acquired 70% of Sabo Ltd.in 20X4.On January 1,20X8,Frey acquired another 10% of Sabo's common shares for $250,000.Under the entity method,the balance of the non-controlling interest at December 31,20X7 was $660,000.What adjustment should be made to consolidated shareholders' equity to reflect Frey's additional purchase of shares?
A)$30,000
B)$136,667
C)$220,000
D)$250,000
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Page 17
Chapter 16: Decreases in Ownership Interest
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Q1) Gumble Ltd.has owned 65% of the common shares of Lopez for several years.This year,Gumble reduced its interest in Lopez to 10%.Which of the following statements is true?
A)Gumble must change from reporting under consolidation to the equity method.
B)Gumble must change from reporting under consolidation to the cost method.
C)Gumbel must change from reporting under the equity method to the cost method.
D)Gumble is not required to change its reporting method.
Q2) When a subsidiary issues shares,________.
A)no gain or loss is recognized
B)a gain or loss is always recognized
C)this reduces minority interest
D)this may increase minority interest
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18
Chapter 17: Preferred and Restricted Shares of Investee Corporation
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Q1) A parent company owns a subsidiary's preferred and common shares.How should the acquisition of the preferred shares be treated?
A)In the same manner as common shares
B)As a retirement of shares
C)As an expense
D)As a deduction from retained earnings
Q2) What is a coattail provision?
A)It allows preferred shares to be converted to common shares.
B)It allows restricted shares to become fully voting shares under limited circumstances.
C)It allows common shares to be converted to preferred shares.
D)It allows restricted shares to receive additional dividends.
Q3) Ngo Ltd.'s subsidiary has restricted shares.What must Ngo look at in determining non-controlling interest?
A)Number of shares only
B)Participation in earnings only
C)Participation in dividends only
D)Participation in earnings and dividends
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Page 19
Chapter 18: Intercompany Bond Holdings
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Q1) Basaraba Ltd.owns 75% of the outstanding common shares of Gill Ltd.Gill purchased all of Basaraba's outstanding bond issue on the open market at a discount.The bonds have an unamortized premium attached.This transaction,in effect,retires the bond and results in a gain.Under the par-value approach to dealing with a gain on elimination of intercompany bond holdings,which of the following statements is true?
A)The gain would be assigned to Basaraba.
B)The gain would be assigned to Gill.
C)The gain is assigned partially to Basaraba and partially to Gill.
D)The gain is eliminated on consolidation.
Q2) A subsidiary has purchased some bonds from its parent company.Under the par-value method,the non-controlling interest is allocated its share of the difference between ________.
A)the bond's market value and face value
B)the bond's face value and carrying value
C)the bond's market value and carrying value
D)the bond's par value and carrying value
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Chapter 19: Fund Accounting
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Q1) Sparrow Pension Plan is a not-for-profit organization that administers the pension fund held for the employees of Sparrow Tech Ltd.What type of fund is the pension fund?
A)Reserve fund
B)Self-sustaining fund
C)Fiduciary fund
D)Endowment fund
Q2) Which statements are affected by inter-fund loans?
A)Statement of operations and consolidated statements
B)Statement of financial position of the individual funds and consolidated statements
C)Statement of operations and statement of financial position of the individual funds
D)Statement of financial position of the individual funds and statement of changes in net assets
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